Morning Dose #273: The Peace Dividend Rally: Earnings, Breadth, and the Fed – Monday 5/25/2026

Situation Awareness

Today’s Market Narrative

The equity market is poised to open higher on Friday, May 25, 2026, riding a wave of optimism ahead of the Memorial Day weekend. The primary driver is the shifting geopolitical landscape, where reports suggest tangible progress in U.S.-Iran talks, even as key differences on uranium enrichment and the Strait of Hormuz remain. This potential de-escalation is fueling a tactical “anti-war trade,” favoring value stocks, long-duration bonds, and small caps, while simultaneously alleviating some of the inflationary pressure that has kept Treasury yields elevated. The S&P 500 is on pace to secure its eighth consecutive weekly gain, a rare feat that underscores the resilience of the current bull market despite the backdrop of rising oil prices and sticky inflation data.

Earnings momentum continues to validate the bullish thesis, with major beats from retail and technology sectors providing the fundamental fuel for the rally. Ross Stores (ROST) and Workday (WDAY) led the charge overnight, with ROST delivering a historic 17% comp sales growth and raising full-year guidance, while WDAY and Zoom (ZM) confirmed that enterprise software demand remains robust. The market is interpreting these results as evidence that the consumer and corporate spending cycles are still intact, even as Walmart warned of waning tax refund support. This dichotomy between broad corporate strength and consumer caution is being managed by investors who are betting on a soft landing, reinforced by the expectation that a peace deal would further cool energy prices and yields.

The technical landscape is equally supportive, with the Russell 2000 and S&P Mid Cap 400 outperforming the mega-cap heavy indices this week. This breadth suggests the rally is no longer reliant solely on the “Magnificent Seven” but is instead spreading across the market. However, the path forward is not without friction. The 10-year Treasury yield is flirting with the critical 4.60% level, and oil prices remain elevated near $97.73/barrel. The market’s ability to maintain its gains will depend on whether the peace narrative can fully override the inflationary fears, particularly as the new Federal Reserve Chairman, Kevin Warsh, takes the helm. The trade environment is one of cautious optimism, where the “why” of the rally (geopolitical de-escalation and earnings growth) is overpowering the “what” (elevated yields and gas prices).

Macro & Policy

The macro backdrop is dominated by the intersection of geopolitical diplomacy and monetary policy transitions. The most significant development is the swearing-in of Kevin Warsh as Chairman of the Federal Reserve at 11:00 ET today. Warsh enters the role at a critical juncture where the recent surge in oil prices has ignited fresh inflation concerns, shifting market expectations for policy easing. The bond market is reacting with a mixed signal: while the 10-year note yield dipped slightly to 4.56% on Friday, it remains dangerously close to the “red line” of 4.60% identified by market strategists. A move above this level, particularly with a “5-handle,” could reignite fears of a tighter financial environment that would threaten the current equity rally.

Geopolitically, the narrative has shifted from imminent conflict to fragile diplomacy. While the U.S. and Iran remain at odds on uranium enrichment and the Strait of Hormuz, reports from CNBC and Reuters indicate that both sides are suggesting progress. This has led to a tactical retreat in oil prices, which fell roughly 8% for the week before stabilizing near $97.73. The market is pricing in a potential “peace dividend,” where a resolved conflict would lower energy costs and reduce the risk premium embedded in asset prices. However, the “Big Picture” analysis warns that the market has already priced in significant optimism, and any failure to reach a deal could trigger a sharp reversal, especially given the sensitivity of the 10-year yield to inflation shocks.

Internationally, the data presents a mixed picture. Japan’s CPI decelerated to 1.4% year-over-year, its slowest pace in four years, prompting speculation of currency intervention as the yen hovers near 160 against the dollar. In Europe, the ECB remains hawkish, with President Lagarde emphasizing attention to second-round inflation effects and policymakers hinting at a likely June rate hike. Germany’s Q1 GDP grew 0.3% quarter-over-quarter, meeting expectations, while the U.K. saw a surprise drop in retail sales. These global divergences are creating a complex currency environment, with the USD/JPY pair testing resistance at 159.15, adding another layer of volatility to the pre-market session.

Economic Calendar Today

• 10:00 ET: Leading Economic Index for April — Expected: -0.3% | Prior: -0.6% — Why it matters: A positive surprise could signal economic resilience, supporting the “soft landing” narrative.
• 10:00 ET: University of Michigan Consumer Sentiment (Final) for May — Expected: 48.2 | Prior: 48.2 — Why it matters: The final reading dropped to 44.8, a historic low, highlighting deep consumer anxiety about inflation and spending power.
• 11:00 ET: Kevin Warsh Swearing-In as Fed Chair — Why it matters: A symbolic and substantive shift in Fed leadership that could influence market expectations for future rate moves.
• Earnings reporting today: No major pre-market reports; focus remains on the weekend’s geopolitical developments and the Fed Chair transition.

Earnings & Corporate News

The earnings season wrap-up was dominated by a handful of high-impact reports that validated the market’s bullish stance. Ross Stores (ROST) was the standout performer, surging 13.4% in pre-market trading after reporting a massive 17% jump in comparable sales, the highest in company history. The retailer beat EPS by $0.29 and raised its FY27 EPS guidance to $7.50-$7.74, driven by transaction volume across all income levels. This result suggests that the “value” trade is still thriving even as consumers face higher gas prices. Workday (WDAY) also impressed, beating EPS by $0.15 and guiding Q2 subscription revenue to $2.455 billion, reinforcing the strength of the enterprise software sector.

In contrast, some names faced headwinds despite beating estimates. Deckers Outdoor (DECK) saw its stock gap down 1.1% after a “smaller-than-usual” beat, as investors worried about moderating growth in its HOKA brand. Similarly, Zoom (ZM) beat on EPS but guided Q2 EPS below consensus, though it received an upgrade to Sector Weight from KeyBanc. On the M&A front, Estee Lauder (EL) surged 13.4% after terminating merger discussions with Puig, a move that the market interpreted as a vote of confidence in its standalone value. These reactions highlight a market that is increasingly selective, rewarding companies with clear growth visibility and punishing those that fail to exceed elevated expectations.

Analyst activity has been robust, with upgrades for Texas Instruments (TXN) to Buy with a $400 target, and Bloom Energy (BE) to Outperform with a $324 target. Conversely, Deckers (DECK) was downgraded to Neutral, and BHP Group (BHP) was cut to Neutral, reflecting a rotation away from cyclical commodities and into growth and defensive sectors. The consensus view is that while the macro environment remains fragile, corporate earnings are providing a solid floor for equities, particularly in sectors that benefit from the “anti-war” trade and resilient consumer spending.

WaveFinder Signal Summary

The WaveFinder scan environment is rich with opportunity, reflecting the broadening market breadth. The Continuation/2LYNCH scan identified 8 high-quality signals, a strong indicator that momentum is not confined to a few mega-cap names. The top signals include KALU (Metals), MCHP (Chips), and DT (Software), all showing strong relative volume and technical setups that align with the broader market uptrend. The Reversal scan is quiet with only 2 signals, suggesting that the market is not currently looking for deep value traps but rather continuing the established trend.

Breadth metrics confirm the bullish regime: 75% of stocks are trading above their 20-day SMA, a significant jump from the prior day’s 34%, while 57.79% are above the 40-day SMA. This expansion in the percentage of stocks above key moving averages indicates that the rally is gaining participation from a wider universe of names. The 4% Bull/Bear gauge shows a overwhelming bullish skew with 294 bulls versus 84 bears, suggesting that the sentiment is firmly in favor of the upside. Traders should look for continuation setups in the top signals, particularly those in the Metals and Software sectors, as the market seeks to extend its eight-week winning streak.

Today’s Watchlist

• ROST — Off-price retailer with 17% comp surge; breaking out to new all-time highs on raised FY27 guidance.
• EL — Surged 13.4% after terminating merger talks; standalone value play in the luxury sector.
• WDAY — Enterprise software beat with strong Q2 revenue guide; technical breakout above key resistance.
• KALU — Metals sector leader with 2LYNCH setup; benefiting from defense spending and industrial demand.
• MCHP — Semiconductor continuation play; strong relative volume and technical alignment with the tech rebound.
• ZM — Mixed earnings but upgraded by analysts; watch for volatility contraction leading to a breakout.

Action Codes of the Day

• 2LYNCH: The market is in a confirmed bullish regime with 8 continuation signals and 75% of stocks above the 20-day SMA, making it an ideal environment for riding momentum breakouts in names like KALU and MCHP.
• T3A: With the Fed Chair transition and potential Iran peace deal looming, traders must think three days ahead to position for a potential “anti-war” rotation into value and small caps before the weekend.